It’s been a mixed 2014 for investors in Cover-More Group Ltd (ASX: CVO) and Sandfire Resources NL (ASX: SFR), with shares in the former making gains of 25% and the latter seeing its share price fall by 3% year-to-date. However, both stocks could turn out to be strong performers moving forward and could be wise additions to Foolish portfolios. Here’s why.
The most obvious reason to buy shares in either company is their stunning growth potential. Indeed, travel insurance provider, Cover-More, is expected to increase earnings at an annualised rate of 36.9% over the next two years. This is an extremely impressive rate of growth and is well ahead of the wider market growth rate. Meanwhile, mining play, Sandfire Resources, is expected to see its bottom line rise by 18.3% per annum over the same time period. Although only half the growth rate of Cover-More, this is still very strong.
Where both companies really start to make sense as investments, though, is in terms of their current valuations. On the face of it, only Sandfire looks cheap. That’s because it has a very low price-earnings (P/E) ratio of just 11.9, which is significantly below that of the ASX (which has a P/E ratio of 15.8). Indeed, Cover-More’s P/E ratio of 31.4 looks rather excessive next to the ASX, but when its growth potential is factored in, it’s an entirely different story.
That’s because Cover-More has a price to earnings growth (PEG) ratio of just 0.85, which is easily more attractive than the ASX’s 1.78. It indicates growth at a very reasonable price, but this is on offer to an even greater extent at Sandfire, since its PEG ratio is even lower at just 0.65. Clearly, both companies offer good value when their prospective growth rates are taken into account, which could help to push their share prices higher.
While neither company offers a top notch yield, strong earnings growth is due to be passed on to shareholders in the form of higher dividends. For instance, Cover-More is due to grow dividends per share by 25.6% per year for the next two years, which means that shares in the company could be yielding as much as 4.8% in 2016. This is double the current yield. Meanwhile, Sandfire Resources is set to grow its dividends per share by 31.8% per annum over the same period, which could turn the current 1.6% yield into 2.8% in 2016 (assuming a constant share price).
So, with highly enticing growth prospects being priced reasonably and income potential on offer, Cover-More and Sandfire could turn out to be strong performers moving forward.
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Motley Fool contributor Peter Stephens does not own shares in any of the companies mentioned
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